Risks To Shareholder Returns Are Elevated At These Prices For Exelon Corporation (NASDAQ:EXC)

There wouldn't be many who think Exelon Corporation's (NASDAQ:EXC) price-to-earnings (or "P/E") ratio of 16.9x is worth a mention when the median P/E in the United States is similar at about 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been pleasing for Exelon as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Exelon

Keen to find out how analysts think Exelon's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For Exelon?

The only time you'd be comfortable seeing a P/E like Exelon's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 9.4%. Still, lamentably EPS has fallen 12% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 8.9% per annum during the coming three years according to the twelve analysts following the company. With the market predicted to deliver 13% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Exelon is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Exelon's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Exelon currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Exelon you should be aware of, and 1 of them doesn't sit too well with us.

Of course, you might also be able to find a better stock than Exelon. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.